Zero-coupon bonds do not make periodic interest payments; instead, they are sold at a discount to their face value and the investor receives the face value at maturity. This means that there is no annual taxable income for individual bondholders until maturity, at which point they receive the full face value, which is subject to income tax.

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Zero-Coupon Bonds

Question 45

Multiple Choice

Zero-coupon bonds:

A) create a tax deduction for the issuer only at maturity
B) create annual taxable income to individual bondholders
C) are only issued by the Australian Government
D) are issued at a premium
E) are valued using simple interest

Correct Answer: